Elgar original reference
Edited by Jan Toporowski and Jo Michell
Chapter 11: Emerging markets
Economic growth in any country depends on capital accumulation and capital accumulation in turn requires investment supported by saving. Harrod’s (1939) dynamic growth theory is a useful starting point for analysing the relationship between output growth, saving and investment in a closed economy. Harrod (ibid., p. 17) expressed the actual growth of output in terms of the ratios of investment and saving to output. Because of its simplicity and intuitive appeal, this formula has proven remarkably useful for the purposes of planning and forecasting of development plans in emerging economies (Thirlwall, 2003). Suppose a country wants to achieve a target output growth of 5 per cent; given an incremental capital–output ratio of 4 per cent, the country needs to save and invest at least 20 per cent of its national income to achieve this target. Generally, the difference between a targeted growth rate and the saving ratio required to achieve this target is called a saving–investment gap. If the required saving rate to achieve 5 per cent output growth rate is 20 per cent, and the country’s actual saving rate is only 15 per cent, the saving–investment gap is 5 per cent.
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